Question

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC. b. If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive. c. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. d. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business. e. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.

Answer 1

a.Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. so this statement is not correct

b. yes this statement is correct. IRR exceeds its WACC then the project shall be accepted as it earns higher than its expectation.

c. false this statement is not correct. NPV of the project depends on its size also appart from IRR. So there are posibilities that the project with big size may have lower IRR but have higher NPV.

d. false IRR calculation assumes cash flows are reinvested at the IRR

e. false